IMF Sounds The Alarm On Leveraged Lending

Friday, November 16, 2018
By Paul Martin

by Tyler Durden
ZeroHedge.com
Fri, 11/16/2018

Five months after the IMF sounded the alarm over junk bonds, it has now moved on to the credit market bogeyman du jour and overnight joined others such as the Fed, BIS, Oaktree, JPMorgan, and Guggenheim in “sounding the alarm on leveraged loans.”

We warned in the most recent Global Financial Stability Report that speculative excesses in some financial markets may be approaching a threatening level. For evidence, look no further than the $1.3 trillion global market for so-called leverage loans, which has some analysts and academics sounding the alarm on a dangerous deterioration in lending standards. They have a point.

This growing segment of the financial world involves loans, usually arranged by a syndicate of banks, to companies that are heavily indebted or have weak credit ratings. These loans are called “leveraged” because the ratio of the borrower’s debt to assets or earnings significantly exceeds industry norms.

With interest rates extremely low for years and with ample money flowing though the financial system, yield-hungry investors are tolerating ever-higher levels of risk and betting on financial instruments that, in less speculative times, they might sensibly shun.

For their part, speculative-grade companies have been eager to load up on cheap debt. Globally, new issuance of leveraged loans hit a record $788 billion in 2017, surpassing the pre-crisis high of $762 billion in 2007. The United States was by far the largest market last year, accounting for $564 billion of new loans.

So far this year, issuance has reached an annual rate of $745 billion. More than half of this year’s total involves money borrowed to fund mergers and acquisitions and leveraged buyouts (LBOs), pay dividends, and buy back shares from investor—in other words, for financial risk-taking rather than plain-vanilla productive investment. Most borrowers are technology, energy, telecommunications, and health care firms.

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